Weekly Market Report: September 30, 2022

Markets put a bow on a week, a month, and a quarter to forget last week including hitting a fresh 52-week low and chalking up the worst month in U.S. equities since 2008. The prior week’s flurry of central bank meetings expressing resolve in battling inflation has resulted in an exceptionally strong USD, surging bond yields, oil
dipping below $80, and an extension of the equity market selloff. U.S. and emerging markets fell approximately 3% while developed international markets were off 1.3%. The 10yr UST traded briefly above the 4% mark but settled back to 3.83% to close the week. Commodities were relatively unchanged on the week and the USD weakened slightly (0.95%) on the week.

Market Anecdotes

• Commensurate with the historic selloff in bonds, a look from Refinitiv and Bloomberg at volatility in interest rates illustrates how much of an outlier we are experiencing with record high MOVE Index readings coupled with record high bond market drawdowns.
• The USD has been on a tear since early 2021 thanks to real rate differentials, risk aversion, and global growth dynamics. Ultimately, dollar strength translates to tightening financial conditions and a domestic deflationary force with respect to global trade.
• Nineteen Fed speaking engagements last week did little to change the narrative coming out of the September FOMC meeting. Focus remained with persistence and resolve on the tightening cycle at hand.
• An upward revision in Q2 personal consumption and decline in initial jobless claims added to the hawkish narrative in what’s likely to be a “good news is bad news” narrative for some time.
• U.S. GDP slipped into negative territory for the first half of 2022 and borrowing costs have risen sharply yet payrolls have increased by an average of 438,000 between January and August and consumers have continued to spend.
• A hot reading in German inflation (10.9% YoY and 2.2% MoM) underscored the need and likely justification for another 75bps ECB hike on October 27th.
• The pandemic rally in overall commodity prices has fizzled with industrial metals, energy, and precious metals all declining but agricultural commodities have stabilized (+3.5% since beginning of August).
• A look by Fidelity at weekly and three-month flows (funds/ ETFs) into equity markets shows investors have yet to run for the exits with flows remaining relatively stable. AAII bearish sentiment readings are near record highs while bullish readings are 17.7% below average.
• Cash is king in a market where both bonds and stocks have been hammered. Bloomberg reports roughly $4.6t is sitting in US money markets, just shy of the 2020 record $4.8t.
• Negative years like 2022 are when hedge funds earn their keep, and this year is no different with CTA and global macro funds profiting nicely relative to long-only/long biased strategies.
• The BoE signaled it would intervene in the bond market to prop up the gilt following a surge in bond yields due to a sizable fiscal stimulus package announced last week. Additionally, the UK government reaffirmed its commitment to BoE independence amidst rumors to the contrary.

Economic Release Highlights

• The August PIO report revealed YoY headline and core inflation of 6.2% vs 6.1% and 4.9% vs 4.8% alongside MoM readings of 0.3% vs 0.2% and 0.6% vs 0.55, all exactly 0.1% higher than forecast.
• The August PIO report revealed higher than forecasted Personal Consumption Expenditures (0.4% vs 0.2%) and in line Personal Income growth of 0.3%. 
• Consumer Confidence in September improved over the prior month, higher than forecasted (108.0 vs 104.3).
• The third revision of Q2 GDP maintained the headline QoQ AR of -0.6% but did see a material upward revision in personal consumption expenditures from 1.5% to 2.0%.
• August Durable Goods Orders were marginally better than forecast with New Orders (-0.2% vs -0.4%), ExTransportation (0.2% vs 0.1%), and Core Capital Goods (1.3% vs 0.7%) exceeding consensus forecasts.
• China’s Caixin Manufacturing PMI Index dipped further into contractionary territory registering 48.1 versus
consensus estimate of 49.4. The CFLP PMI (C, M, S) registered 50.9, 50.1, 50.6.
• July Case-Shiller Home Price Index missed consensus on both MoM (-0.4% vs +0.3%) and YoY (16.1% vs 17.0%) measures.
• August New Home Sales of 685k came in much stronger than the 498k forecasted and increased over the prior month’s reading of 532k. Pending Home Sales fell 2% versus expectation of -0.8%.

Weekly Market Report: September 23, 2022

All eyes were on the FOMC decision and narrative last week with a relatively light economic calendar and sparse 2Q earnings announcements. Safe to say, the Fed delivered another dose of tough love, and it wasn’t very well received by risk markets as it was made clear the Fed is pretty comfortable with a policy induced recession. Thanks in large part to surging global interest rates, global equity markets traded down sharply with the S&P 500 touching a new bear market low, now -23.7% below the post Covid high. Developed international and emerging market equities traded sharply lower as well as U.S., German, and U.K. bond yields all marked new multi-year highs. Oil (-7.5%) dragged the commodity complex lower in sympathy with slowing global economic activity.

Market Anecdotes

• It was a difficult week with surging global bond yields and the ripple effect in what has been a historic bond market route and commensurate slide in equity markets where we’ve now endured three 10%+ downdrafts following the record high in early January.
• The surge in bond yields is historic no matter how you look at it. The 2y/10yr inversion exceeded 50bps last week – the deepest inversion we’ve seen since 1982 and a level commonly found in recessions (22% of the time) and always within 15 months of one.
• The FOMC delivered a third consecutive 75bps rate hike last week, taking rates to 3.0-3.25% and revised projections to another 125bps by year end with terminal rate expected to land at 4.5%-4.75%.
• In addition to median rate expectations detailed above, the SEP included downward revisions to forecasted economic growth and upward revisions to core inflation and unemployment.
• Synchronized tightening maintained its global theme last week with the U.S., BoE, Sweden, and Swiss central banks (among others) hiking rates while the BoJ again left rates unchanged. Accordingly, overall financial conditions have tightened meaningfully.
• USD strengthened 3.12% last week, wreaking havoc on FX markets including inducing Japan to engage in its first direct FX intervention since the 1990’s. The Euro is down 17% YTD and only three EM currencies (Mexico, Peru, Brazil) are up on the year with most down over 10%.
• The British Pound traded sharply lower on the announcement of a UK plan for the largest tax cuts since 1972, including the elimination of the top income tax bracket in a bid to stoke growth.
• Despite exceedingly tight global oil markets and ever-present geopolitical risk, oil has traded down in sympathy with concerns about falling global demand amid the economic slowdown.
• The Atlanta Fed GDPNow model which was firming in early August has deteriorated sharply in recent weeks with the latest Q3 U.S. GDP estimate at 0.3%.
• One consistently dovish monetary policy talk point is that while current inflation remains elevated, households seem to expect the Fed to succeed in bringing down inflation based on NY Fed, UofM and other household survey data.

Economic Release Highlights

• September U.S. PMI (C,M,S) of 49.3, 51.8, 49.2 measures improved meaningfully relative to August and beat consensus (47.0, 51.3, 45.0) across the board.
• September composite, services, and manufacturing PMI prints for September in the EU and UK were all in contractionary territory.
• The Conference Board LEI for August declined 0.3%, more than expectations for -0.1%, posting a sixth consecutive MoM decline.
• August Housing Starts (1.575M vs 1.440M) and Permits (1.517M vs 1.621M) came in above and below respectively, their consensus estimates. Existing Home Sales of 4.8M came in higher than forecasted (4.7M) but in a slowing trend with both MoM (-0.4%) and YoY (-19.9%) cooling off.
• September’s Housing Market Index registered a depressed 46 versus a consensus estimate of 48

Weekly Market Report: September 16, 2022

Markets last week had to digest a higher likelihood of a steadfast hawkish Fed in light of the economic calendar both here and abroad. Investors were again faced with little to no winners as equity markets and bond markets sank together, in what has been a clearly increasing pattern of rising rates/inflation anxiety corresponding to falling equity market prices. By the end of the week, the S&P 500 was within 5% of retesting the June lows and interest rates were at or above the June highs, depending on the term. The USD rallied in typical risk off/higher interest rate fashion while commodities broadly moved lower on the week.

Market Anecdotes

• A hot inflation reading on Tuesday may have reduced the odds of the Fed engineering a soft landing, offsetting increased soft landing odds stemming from last month’s employment report.

   

• That the aggressive pace of Fed rate hikes has markets on edge might be understandable given we’re looking at the fastest six-month pace of rate hikes since 1981, assuming 75bps this week.

   

• Futures markets have priced in an additional 50bps of rate hikes in recent days, to a terminal rate of 4.5% by April of 2023, which has been reflected in both economic forecasts and stock/bond market pricing as well.

   

• Happy endings have clearly not been the weekly trend in 2022 with more 1%+ down days ending the week than any year since 1952. This week was thanks in part to a very public warning of weakening earnings and slowing global growth from FedEx CEO Raj Subramaniam.

   

• A current look at market technicals shows the S&P 500’s rejection of the 200 daily moving average and subsequent breakdown toward the bear market low in June means the downtrend is still very much in place with markets again flirting with oversold technical conditions.

   

• Another look at positive stock and bond correlations and the resulting headwind to standard investment portfolios shows both shorter and longer term trends dramatically on the rise.

   

• Election cycles and mid-term predictions will now begin to ramp up warranting a look at which policy debates have market implications and requisite historical election cycle market patterns.

   

• Eurozone inflation is doing the ECB no favors as regional CPI marked record highs for eleven consecutive months.

Economic Release Highlights

• CPI for August reported MoM headline (0.1% vs -0.1%) and core (0.6% vs 0.3%) and YoY headline (8.3% vs 8.1%) and core (6.3% vs 6.1%). 
• The latest New York Fed Survey of Consumer Expectations show median 1yr, 3yr, and 5yr ahead inflation expectations falling 
• August Retail Sales increased 0.30% (vs expectations for -0.1%), a rebound from prior month’s -0.40% reading. 
• August’s NFIB Small Business Optimism Index improved to 91.8, slightly higher than expected (90.5) and a small improvement over the prior month (89.9). 
• UofM Consumer Sentiment improved from 58.2 in August to 59.5 in September. 
• Industrial Production in August softened 0.20%, a slowdown from prior month’s 0.50% growth.

Weekly Market Report: September 9, 2022

In a holiday shortened week, markets digested a large dose of FOMC speaking engagements, a very light economic calendar, and requisite geopolitical interference. The result was a pronounced rally across U.S. and developed non-U.S. equity markets with emerging markets ending flat to slightly down on the week. Interest rates continued their march higher with the yield curve moving up in parallel fashion leaving the 10yr UST at its highest level since the June 2022 bout of market volatility. The USD fell slightly on the risk rally and the commodity complex finished in the red with oil trading sideways but natural gas falling 9% on the week.

Market Anecdotes

• From an equity market technical perspective, it feels like the bears are in check until the June lows are taken out while the bulls are in check until the mid-August highs are taken out.
• It was a busy Fed speaking circuit last week with markets (perhaps foolishly) hoping for a second consecutive slowdown in CPI data taking the Fed hawkish narrative back a bit. The labor market and wage inflation may well just take the wheel for the hawkish narrative.
• Falling inflation data points are growing including Baltic Dry Index, Logistics Manager Index, WCI Shipping Rates, Warehousing/Transportation Pricing, ISM and regional Fed Delivery Times/Prices Paid/Prices Received, commodity prices, gas prices, vehicle prices, and rental prices.
• Fed whisperer Nick Timiraos published a WSJ article highlighting little pushback from FOMC members regarding expectations for a 75bps hike at the September FOMC meeting. Four minutes later, market probabilities for 75bps increased from 72% to 92%.
• Both the ECB and BoC announced 75bps hikes to their policy rates, larger than the 50bps consensus. The European rate now stands at 1.25%.
• Bond market carnage continued last week now with the Barclays Aggregate Index 1yr, 2yr, 3yr, and 5yr total returns all at the worst levels on record.
• The consensus case against imminent U.S. recession beyond pent up consumer demand (liquidity) and a robust job market is pent up capex where capital goods orders are near 1998 levels and the average age of fixed assets are at their ‘oldest’ since 1964.
• Lithium refineries, battery manufacturing plants, solar/wind power installs, and power grid investment are beginning in earnest in what is expected to total $1.2t in investment by 2035, spurred in part by the recently passed climate/infrastructure bill.
• Reuters reported this week that the U.S. Strategic Petroleum Reserve has fallen to its lowest level (442.5mb) since November 1984.
• The EU foreign policy chief and U.S. officials signaled a new Iran nuclear deal is not expected to happen anytime soon.
• An eventful (and somber) week in the UK saw the passing of Queen Elizabeth and the appointment of Liz Truss as the next Prime Minister.

Economic Release Highlights

• August ISM Services Index came in at 56.9 versus consensus forecast of 55.4, toward the higher end of consensus range of 53.5 to 57.0.
• Weekly initial jobless claims fell slightly WoW to 222k.

Weekly Market Report: September 2, 2022

Last week marked the unofficial end of summer, the beginning of a new school year, the end to a difficult August, and a lumpy opening for September. Markets digested the August jobs report and were forced to acknowledge the Fed’s resolve on inflation despite indications of a meaningful slowdown in the economic environment and what looks like the beginning of a slowdown in inflation data. Equity markets closed the week down over 3% with broad weakness across sectors. The yield curve was volatile at both ends of the curve leaving the 2yr/10yr still solidly in inverted territory (2y/10y) and rates higher across the curve. The 10yr closed the week up 16bps to 3.20%. Commodities fell sharply on slowing global growth concerns and we saw a +0.67% flight to quality rally in the USD.

Market Anecdotes

• After being way too dovish for way too long, the Fed seems intent on a path of the opposite extreme for the
  time being and markets are pricing in a corresponding economic contraction.
• The disconnect between market expectations and FOMC projections is being reconciled over the past couple of weeks. Strategas look at several macro indicators shows how conditions have clearly tightened over the past 45 days.
• Market technicals look mixed with the S&P 500 holding the 3,900-support level last week but Europe has already pushed itself back to June levels – suggesting U.S. markets may also revisit.
• Slowing global growth and the policy response to inflation have investors on edge. Percolating evidence of supply side and pandemic related disinflation may offer some glimmers of hope.
• The pain of rising interest rates is clear and translates to rising mortgage rates (30yr (5.66%), 15yr (4.98%), and 5/1 adjustable (4.51%)) exerting pressure on the housing market. Rates are also pressuring P/E multiples which sit near the midpoint of the range over the last ten years.
• Bloomberg noted some concern surrounding declining (but still record high) commercial bank deposits with the first QT ramp up set to begin in September – possibly a demand side technical concern but Bianco Research illustrated the case that there will be no selling of bonds/notes through 2024 at these levels.
• Last week in geopolitics saw the U.S. send two guided missile cruisers through the Taiwan Strait, a U.S. order to Nvidia and AMD to halt certain AI chip exports to Russia, China, and Hong Kong, hiccups in the Iran nuclear investigation, and Russia halting natural gas supply to Europe.
• The EU energy crisis with December and February sanctions looming has EU bound Russian gas being flared, the EU buying gas at any price, and a G7 agreement of a price cap on Russian oil.

Economic Release Highlights

• The August jobs report revealed 315,000 new jobs, just beyond the consensus forecast of 293,000 but the unemployment rate ticked 0.02% higher to 3.7%. The labor market participation also increased 0.02% to 62.4%.
• ISM Manufacturing Index for August stayed at 52.8, just above the spot consensus forecast of 52.0.
• The Case-Shiller Home Price Index rose 0.4%, less than the 1.1% consensus forecast.
• Consumer Confidence in August climbed to 103.2, ahead of the consensus estimate of 97.4 and above the high end of the range.
• The July JOLT survey showed 11.239mm job openings, well more than the consensus 10.4mm and above the high end of the range.

Weekly Market Report: August 26, 2022

Markets returned their focus to the macro backdrop last week and didn’t applaud what they saw and heard. We saw a relatively packed (and weak) economic calendar punctuated with the KC Fed Jackson Hole Economic Symposium where central bankers, academics, economists, and policy makers rubbed elbows and waxed poetic. By week’s end, U.S. equity markets had fallen between 3%-4% while emerging (+0.28%) and developed (-3%) international markets held up slightly better. Interest rates and the USD responded to hawkish Fed commentary with rates moving rates higher in the shorter maturities and an ensuing bid for the USD. Commodities rallied (+2.8%) with energy, grains, and metals strengthening across the board.

Market Anecdotes

• With all the hullabaloo, Bloomberg News made clear history’s suggestion that Jackson Hole speeches rarely mark a policy shift/turning point for the markets. That said, Powell and company certainly did a number last week. 
• The tenuous dance between the Fed and markets with slowing inflation readings pulling dovish market sentiment to levels the Fed seems determined to push back on for now. Market based monetary policy expectations shifted last week accordingly. 
• The ‘year of the 60/40 portfolio continues to deliver with both stock and bond markets both sitting over 10% in the red YTD and very little company from a misery loves company perspective. 
• After rejecting the 200dma last week, U.S. equity markets continued their retreat closing just above the 50 dma and feeling the pinch of higher rates and monetary policy headwinds. Deteriorating sentiment, however, should be viewed as a constructive contrarian indicator. 
• Fundamentals surrounding earnings and profit margins reinforce a note of caution with respect to the forward outlook and trends respectively. 
• Monday marked the first time in twenty years where a USD was worth more than a Euro. 
• Softness in the housing market from exuberant levels of late 2021 to early 2022 is apparent. Bianco Research examined several alternative measures also illustrative of both pricing trends and the technical backdrop. 
• A look at narrow market leadership and average correlations among stocks within the S&P 500 illustrate some of the primary headwinds for active managers in place since the GFC and era of central bank intervention policies. 
• China announced a $150bn stimulus package last week resulting in some positive momentum in emerging markets. Whether that’s material enough to matter remains the key question.

Economic Release Highlights

• July MoM PCE Inflation of headline (-0.1% vs 0.1%) and core (0.1% vs 0.3%) and YoY headline (6.3% vs 6.3%) and core (4.6% vs 4.7%) both came in slightly below estimates. 
• July Personal Income (0.2% vs 0.6%) and Personal Consumption Expenditures (0.1% vs 0.4%) both came in softer than expected. 
• August U.S. PMIs (C, M, S) continued to contract in August with readings of 45.0, 51.3, 44.1, all missing and coming in at or below the lowest end of consensus range. 
• August EZ PMIs (C, M, S) of 49.2, 49.7, 50.2 all came in slightly higher than consensus while Japan’s readings of 48.9, 51.0, 49.2 moved slightly lower versus the prior month. 
• July New Home Sales (511k) came in under consensus of 575k and below the low end of the range of forecasts. July Pending Home Sales of -1% was slightly better than -2.5% forecasted. 
• The final UofM Consumer Sentiment Index for August was revised notably higher to 58.2, well above the point estimate of 55.1 and range of 55.1–56.0. 
• July Durable Goods Orders (0.0% vs 0.5%) missed on the headline but beat on the ex-transportation (0.3% vs 0.1%) reading and core capital goods posted growth of 0.4%.